Do we have too much or too little innovation? Blog #6

We are surrounded by talk about innovation, in the media and in government pronouncements. But do we really have too much, or too little of it? Before we can answer this question, we need to establish a framework:

What is our definition of innovation? There are hundreds if not thousands of definitions to choose from. One widely used is from the OECD (Organization for Economic Cooperation and Development), which see four different types of innovation: product innovation (e.g. a new iPhone), process innovation (e.g. lean manufacturing), marketing innovation (e.g. Amazon) and organizational innovation (e.g. outsourcing). This definition is helpful for commercial innovations but does not capture broader aspects of innovation such as social innovation and public sector innovation including regulatory innovation.

What role does innovation play in the economy? The economist William J. Baumol sees innovation as the principal weapon of competition in the free market economy, and entrepreneurship as the vehicle for bring innovations into existence. So innovation is the lifeblood of our economy. He sees three main roles for entrepreneurship: productive entrepreneurship (a useful new product or service); non-productive entrepreneurship (for example, exploiting a monopoly or a tariff wall) and destructive entrepreneurship (criminal behaviour).

Risk and uncertainty. One aspect of innovation that is not apparent from the definitions above is the inherent risk of an innovation. The whole nature of innovation is to “suck it and see”. When a new product or process is launched, it faces a whole range of risks some of which can be predicted in advance, but many of which cannot. So trying new things is inherently risky and uncertain.

Life cycle. Another aspect not apparent from the definitions above is that innovations have a life cycle. New things get commercialized and are welcomed as innovations; more and more of them get sold and new competitors entre the market and eventually the “new “ thing becomes communized and is replaced in turn by something else.

Having set up a framework, we can see that innovations are just solutions to problems. Quite often, the problems have not been recognized before the innovation comes along. Henry Ford is reputed to have said that if he had asked his customers what they wanted they would have said “faster horses”.

So we can re-frame the question to ask what are the big problems needing solutions today? The answer is straightforward, and jumps out from the headlines of the newspapers and TV news:

Inequality

Global warming

Trade protectionism

Oil sands emissions and costs

Terrorism

The impact of automation on jobs

This list can obviously be extended. However, it does give a clue to where we do not yet have enough innovation.

Where do we have plenty of innovation? Again, we can look to the headlines:

Self driving cars

Artificial intelligence

Drones

Robotics

Blockchain

Quantum computing

This list can also be extended. So there are clearly areas where innovation is alive and very well. This list also include some public sector innovations. For example, the experiment in Ontario with a Basic Income, to provide a level of income for selected households for a three-year period and evaluate the impact. This experimental approach to government policy making is a new development that is staring to emerge around the world.

To return to our initial question: do we have too much or too little innovation? It depends where you look. We are woefully short of innovations is some areas, while other areas are doing just fine.